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Market Microstructure: Confronting Many Viewpoints by Thierry Foucault, Mathieu Rosenbaum, Charles-Albert Lehalle, Frédéric Abergel, Jean-Philippe Bouchaud

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6

Limit Order Flow, Market Impact, and Optimal Order Sizes: Evidence from NASDAQ TotalView-ITCH Data

Nikolaus Hautsch and Ruihong Huang

6.1 INTRODUCTION

Electronic limit order book (LOB) systems are the dominant trading form of most financial markets worldwide, including leading exchanges like NASDAQ, NYSE, BATS, and Euronext, various Alternative Trading Systems (ATSs), and Electronic Communication Networks (ECNs). The recent decade witnesses substantial technological progress in trading systems as well as trade recording and an increasing importance of intraday trading. Transparency, low latency, high liquidity, and low trading costs attract an increasing number of intraday traders, long-horizon traders as well as institutional investors. Though electronic limit order book trading has already existed for many years, further developments in trading systems and structures are ongoing and are faster than ever before. The successive automatization of order management and execution by computer algorithms, the growing importance of smart order routing as well as changes of market structures and trading forms challenge empirical and theoretical market microstructure research.

The objective of this chapter is to provide new empirical evidence on order activities and market dynamics at NASDAQ – the largest electronic market for equities in the US By employing TotalView-ITCH data containing information directly stemming from the NASDAQ data feed, our study sheds some light on recent order ...

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